The Tax Cuts and Jobs Act (TCJA) of 2017 significantly reshaped the American tax landscape in numerous ways, impacting individuals from all walks of life by aiming to simplify the tax code, spur economic growth, and provide relief to taxpayers. While some provisions of the TCJA were permanent modifications to the tax code, many of those affecting individuals and families were only temporary and are set to expire at the end of 2025. The expiration of these provisions may potentially to lead to higher tax liabilities for many Americans. This blog will discuss a few of the major ramifications of the sunsetting TCJA and steps individuals can take to prepare.
Increased income tax rates
One of the most significant changes introduced by the TCJA was the restructuring of individual income tax rates and brackets. Tax rates were lowered across several income brackets, with the top marginal rate dropping from 39.6% to 37%, and income brackets were widened. This allowed many taxpayers to lower their tax bill and retain more of their income. When these provisions expire, tax rates will revert to pre-TCJA levels and individuals and families will likely see an increase in their tax liabilities. To take advantage of the lower tax rates through 2025, individuals can consider making Roth conversions, increasing withdrawals from inherited IRAs, and exploring ways to accelerate income. They should also consider reviewing and adjusting their withholding to avoid surprises come tax season and ensure they are maximizing retirement contributions to accounts such as a 401(k) to reduce taxable income.
Decreased standard deduction
The TCJA nearly doubled the standard deduction, making it more attractive for many taxpayers to opt for the standard deduction rather than itemizing their deductions. This simplification aimed to streamline the tax filing process for millions of Americans. The expiration of this provision will mean a lower standard deduction, possibly increasing taxable income. Individuals can prepare by tracking deductible expenses more closely and considering deferring itemizable deductions until after 2025, if possible. This could include mortgage payments, charitable contributions, and medical expenses.
Changes to credits and deductions
Various deductions and credits that impact individuals’ tax liabilities were also modified by the TCJA. While it expanded the child tax credit and introduced a deduction for qualified business income for certain pass-through entities such as partnerships and S corporations, it also placed a cap on certain itemized deductions, such as the deduction for state and local taxes (SALT) and the mortgage interest deduction. These changes led to varying effects depending on individual circumstances and therefore consulting with your Vision Capital Client Relationship Manager or a tax professional is key to understanding how to mitigate the possible consequences of these changes.
Lowered estate tax exemption
For those with large estates, the TCJA legislation offers a significant tax saving opportunity by nearly doubling the lifetime estate and gift tax exemption amount. For 2024, the exemption is $13.61 million per person and $27.22 million for a married couple, however the sunset of this provision would cause those values to drop to approximately $7.5 million and $14.5 million respectively, depending on inflation. Reducing a sizable estate through methods such as gifting, establishment of a trust strategy, and charitable giving are ways individuals can prepare for the lowered exemption.
In conclusion, the Tax Cuts and Jobs Act of 2017 brought about significant changes to the U.S. tax code that have had a profound impact on individuals and families. While there is a possibility that the provisions could be extended, currently they are scheduled to expire at the end of 2025 and thus it is critical to plan with that expectation in mind. Vision Capital Management Client Relationship Managers strive to understand your financial future and work to strategize with you to optimize your plan for these changes. Working with experienced professionals and planning ahead will help you navigate this period of transition in the most efficient and advantageous way.
